The Real Threat To Netflix Isn't RedBox Or BlockBuster

After Netflix (Nasdaq:NFLX) announced what was essentially a price increase for a significant number of its users, it took investing pundits and forecasters about two nanoseconds to predict where these displaced customers would end up taking their video-watching business. (For more on entertainment stocks, check out Analyzing Show Biz Stocks.)

Both Blockbuster (PINK:BLOAQ) and RedBox - owned by Coinstar (Nasdaq:CSTR) - were found at or near the top of most lists, which makes sense. Blockbuster is the closest clone of Netflix in that it offers physical DVD rentals through the mail in addition to on-demand video delivered through a web connection. It also offers an 'in store' rental option with some of its packages. RedBox doesn't do online content (digital delivery), but its 27,000 DVD rental kiosks across the nation make for decent access to its movies.

John Kraft and Douglas Greiner of D.A. Davidson's research and analysis arm estimate that the Netflix price change will affect 17.6 million customer, with 12 million of them opting for the lower priced "streaming only" service. Since these users will lose access to new release features (most new releases are available only on DVD well before they're accessible online), movie watchers looking for new release bargains will likely seek out RedBox's economical rate of $1 per night for the latest films.

The pro-RedBox sentiment is a pretty common one too, though Blockbuster's On-Demand service, even if pricier than RedBox, also offers the new releases that consumers are implied to crave.

The real threat to Netflix now, however, may not be from one of these clear competitors

OverlookedThere may be three familiar names with minor on-demand video operations today that can be scaled up quickly now that Netflix has leveled the playing field on the price front. Yet, nobody's putting them into the mix yet ... perhaps because these online-streaming ventures are nothing more than rumors at the moment. Yet, they're all very plausible rumors.

Apple Inc. (Nasdaq:AAPL) - In simplest terms, the buzz is that Steve Jobs is working on a re-launch of Apple TV that will be much more marketable in that it's web-based and integrated, because Apple will actually make the television sets.

Amazon.com (Nasdaq:AMZN) - Historically in the shadows in the on-demand and DVD rental war, Amazon's on-demand, per-rental price and access to new features puts it in a league with Blockbuster and RedBox. But, its "Prime" service is in the same vein as the Netflix instant-streaming package, with 5,000 TV shows and movies for only $79 per year. (To help determine where these competitors affect Netflix, check out Using Porter's 5 Forces To Analyze Stocks.)

DVD Vs. OnlineThe question of course becomes, which is more important to Netflix - DVDs, or online content?

Just for the sake of argument, what if the experts are overestimating consumer's desire for new releases (and by extension overestimating the need for a physical DVD), and simultaneously underestimating the average consumer's willingness to take what they can get at home if it means avoiding yet-another car trip? After all, the $1.00 rental from RedBox costs much more than $1.00 when factoring in time and gas.

In that sense, consumers may gladly give up the DVDs, which also means they could easily give up Netflix and opt for another comparable service.

That raises the other question though - isn't Netflix the king of online content? If it is, then it will maintain its competitive advantage even if it squeezes some consumers out of its DVD offers. As such, the winner/loser debate is pointless.

There's little doubt that Netflix was the king of online content. Now, however, it's not so clear.

In late June, Sony Corporation's (NYSE:SNE) movies were removed from the Netflix streaming menu and are still offline. The reason for the removal is ultimately part of a contract renegotiation from Sony that's expected to cost Netflix more. Other content contracts expire within a couple of years, and the renewal of those deals is expected to cost Netflix more as well.

And interestingly, though the company has neither confirmed nor denied it, Apple has purchased enough land in North Carolina to house two data storage centers that exceeds its need to just the storage of data (like apps) and music. Peter Misek, an analyst with Jeffries, suspects the second center could be one being built to store video.

Coinciding with the planning of the data center is Time Warner's (NYSE:TWX) recent removal of some content from its iTunes store; Misek suspects it's a sign that the two companies are in renegotiation as well as part of the beginning of a web-based television product that will be so much more than the current Apple TV service.

Point being, content creators like Sony and Time Warner are shopping around now that they realize they have other viable and lucrative options.

The Bottom LineLess content? Higher plan prices and/or lower profitability? DVDs becoming less relevant now that first-run movies are available for download? Nowhere to go but down? Oh well, it was a good three-year run for Netflix. Apple and Amazon appreciate the company developing the market. (With rising cost it is important to understand why Netflix has increased it pricing strategy by reading A Look At Corporate Profit Margins.)